I recent­ly watched the fed­er­al trea­sur­er, Scott Mor­ri­son, proud­ly pro­claim that Aus­tralia was in “sur­pris­ing­ly good shape”. Indeed, Aus­tralia has just snatched the world record from the Nether­lands, achiev­ing its 104th quar­ter of growth with­out a reces­sion, mak­ing this achieve­ment the longest streak for any OECD coun­try since 1970.

Aus­tralian GDP growth has been trend­ing down for over forty years
Source: Trad­ing Eco­nom­ics, ABS

I was pret­ty shocked at the com­pla­cen­cy, because after twen­ty six years of eco­nom­ic expan­sion, the coun­try has very lit­tle to show for it.

A blog mem­ber has kind­ly pro­duced a tran­script of the off-the-cuff talk I gave at this forum. I’ve made minor cor­rec­tions to the punc­tu­a­tion below, but the text is oth­er­wise as deliv­ered on the night with­out speak­ing notes–so there are some gram­mat­i­cal slips. For those who want to lis­ten to this alone–without also lis­ten­ing to Bernie Fras­er beforehand–here is a link to the MP3 of my talk.

“Lies, damned lies, and sta­tis­tics” is part of a phrase attrib­uted to Ben­jamin Dis­raeli and pop­u­larised in the Unit­ed States by Mark Twain: “There are three kinds of lies: lies, damned lies, and sta­tis­tics.” The state­ment refers to the per­sua­sive pow­er of num­bers, the use of sta­tis­tics to bol­ster weak argu­ments, and the ten­den­cy of peo­ple to dis­par­age sta­tis­tics that do not sup­port their posi­tions. (Wikipedia)

Two recent speech­es by the RBA sup­port­ed the con­tention that Aus­tralian house prices are no longer over­val­ued, that mort­gage repay­ment costs have returned to his­toric aver­ages, that Aus­tralia is suf­fer­ing a hous­ing short­age, and there­fore that the Aus­tralian hous­ing mar­ket should not expe­ri­ence the cat­a­stroph­ic falls that are now com­mon­place across the OECD–and espe­cial­ly in the USA.

“I do not know any­one who pre­dict­ed this course of events. This should give us cause to reflect on how hard a job it is to make gen­uine­ly use­ful fore­casts. What we have seen is tru­ly a ‘tail’ out­come – the kind of out­come that the rou­tine fore­cast­ing process nev­er pre­dicts. But it has occurred, it has impli­ca­tions, and so we must reflect on it.”

If things are real­ly grim, it helps to have an inde­fati­ga­ble nature, and there’s no doubt that RBA Deputy Gov­er­nor Ric Bat­telli­no has that in spades—at least in the speech­es he makes at pub­lic con­fer­ences. Were I being cru­ci­fied, I’d like to have Ric up there with me, singing “Cheer up Bri­an!…”, to take my mind off the nails.

But were I still in the Gar­den of Geth­se­mane, and actu­al­ly try­ing to avoid the Romans (and an extend­ed Pilates ses­sion the next day), I think I’d want some­one else on look­out duty.

Just two years ago, Cen­tral Banks appeared tri­umphant. Infla­tion, the scourge of the 1970s and 80s, appeared dead, the finan­cial cri­sis of the Tech Wreck had been con­tained, economies world­wide were boom­ing, and stock mar­kets and house prices were spi­ralling ever upwards.

Then along came the Sub­prime Cri­sis, and we received a rude reminder of why Cen­tral Banks were cre­at­ed in the first place: to ensure that the world would nev­er again expe­ri­ence a Great Depres­sion.

Late last year on SBS News, when Stan Grant asked me which way the RBA would move rates in 2008, I replied “Up, and then down”, Stan quipped “Spo­ken like a true economist–an even hand­ed answer!”–to which I replied “More down than up”.

I expect­ed the intial rate ris­es because of the RBA’s focus on the rate of infla­tion, and a sub­se­quent fall, not because infla­tion would be head­ing down, but because the econ­o­my would be–and the RBA rate would be forced to fol­low it

Video overview

Debunking Economics II

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